Bank failures unnerve reverse mortgage holders

Published 7:58 pm Friday, July 25, 2008

Bank failures are absolutely more emotional for seniors, especially when mortgage products were built, aimed and sold with them in mind. Ask any mortgage specialist in the reverse mortgage business: Reverse mortgages cannot be explained or promoted like any other forward instrument. They are more about hand-holding and assuring older citizens that no matter what happens, their future has a monetary cushion for as long as they live in their home.

IndyMac Bank, the parent company of jumbo reverse mortgage specialist Financial Freedom, recently failed. IndyMac was the second-largest mortgage lender in the United States and the seventh-largest savings and loan. The bank reopened as a new entity, IndyMac Federal Bank, operated by the FDIC as conservator.

For older folks with reverse mortgages, the bank’s reopening was clouded by some of the negative perceptions that originally hounded the industry — that something might happen that could keep seniors from receiving their hard-earned, and now dearly needed, equity in their homes. Fears extended not only to Financial Freedom customers, but to the broader reverse mortgage world as well.

Peter Bell, president of the National Reverse Mortgage Lenders Association, said Financial Freedom will continue to conduct business as usual. Loans will continue to be funded, disbursements will continue to be made to customers with available lines of credit and applications will continue to be accepted. The only difference, essentially, is that the parent company is now IndyMac Federal Bank, FSB, which will be operated by the FDIC.

But try to explain that to a senior who is really in a pinch. For example, Frannie, an widow in her 80s from Northern California with a Financial Freedom reverse mortgage, had been trying to sell her large rural home, pay off the reverse mortgage and buy a condominium closer to her children. In late spring, a water pipe in an upstairs bathroom burst while she was visiting friends and the damage was severe. Floors, walls, carpet and furnishings had to be replaced before she could put the home back on the market.

The insurance company made out the check, in excess of $100,000, to Frannie and Financial Freedom. She sent the check to bank to be endorsed so she could begin paying her contractor. The bank refused, saying Frannie had to sign first so that the bank could write periodic checks to the contractor to make sure the work was actually completed.

Weeks passed because Frannie was unwilling to sign over the insurance check to Financial Freedom. Finally, a bank representative promised Frannie that Financial Freedom would make three payments to the contractor as portions of the job were done. Frannie would receive copies of the checks.

The day Frannie signed the check and mailed it to Financial Freedom, the feds took over IndyMac Bank.

“Now what do I do?” Frannie said. “They’ve got my check and they’re broke? And, what happens now to my reverse mortgage money that I need to live on?”

Frannie decided to contact the insurance and ask that a “stop payment” be made on the check. She asked that it be reissued to her and her contractor.

“What would you have done?” Frannie asked. “I felt I was at the end of my rope. It’s not like I have somebody walking me through all of this. At my age, I don’t need this. Nobody does.”

Seniors seek routine, dependable payments and routines. For decades, they did not want to hear how their mortgage was going to adjust every month. They were reluctant to accept conventional adjustable-rate mortgages and were skittish about the concept of reverses, especially if the mortgages adjusted and were tied to an index they did not understand or had ever heard of. The introduction of the first fixed-rate reverse mortgage was a godsend to lenders and consumers and industry officials also continued to work to improve the reputation of all reverse mortgages.

For example, the loan fees associated with reverse mortgages are higher than those of most conventional mortgages. That’s because most reverses require mortgage insurance in the event the senior outlives the value of the home. Financial Freedom pioneered a no-fee jumbo reverse that satisfied some of the higher-end customers while the federally insured Home Equity Conversion Mortgage also made huge strides in reducing fees and improving a once-bulky process.

But the IndyMac failure brought deep-rooted questions of reliability from many people who have nothing more to rely on than their home. It’s not just about the actual money. It’s more about trust, perception, promises and putting older people in the position of worrying about their financial future.

Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.